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Estate Planning > Advanced Estatte Planning > Flashcards

Advanced Estatte Planning Flashcards

1
Q

How do you qualify for the UMD?

A
  • Be married as of DOD.
  • Be a US citizen.
  • Receive property thru the estate.
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2
Q

Can the gross value of the estate be left to the spouse?

Hint: this tenet prevents abuse.

A

No, only the net value after debts, taxes, and estate expenses.

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3
Q

What are the 3 qualifications for using the UMD?

A
  1. Property must pass thru the gross estate.
  2. Property must be transferred to the surviving spouse.
  3. Property must not include a terminal interest.
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4
Q

What are the 4 exceptions to the terminal interest rule?

A
  • 6 mo. survival Contingency.
  • General POA
  • QTIP
  • CRT (Charitable Remainder Trust)
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5
Q

What are an A trust and a C trust?

A

A = General POA trust

C = QTIP

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6
Q

What is an Estate Trust?

What do you use it for?

A

An estate trust only allows the owner to appoint items in the trust to his own estate. It’s UMD, but it’s not required to distribute its income.

It’s used to pass non-income-producing property.

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7
Q

What are the qualifications for a QTIP?

A
  • Must be included in the estate of 1st to die spouse.
  • Surviving spouse is entitled to all trust income, and must be paid at least annually.
  • Spouse has the right to force the trustee to sell non-income producing assets and buy income producing ones with the proceeds.
  • During spouse’s lifetime, no one else can appoint trust assets.
  • Must elect QTIP on 706 or 709.
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8
Q

What is the annual exclusion (gift or inheritance) to a non-citizen spouse?

A

$159,000.

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9
Q

What is the “citizenship” way around this for estate bequests?

A
  • spouse becomes US citizen, before the due date of the estate tax return and maintain residency here.
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10
Q

What trust can a non-citizen spouse use to qualify for the UMD?

What does it need to qualify?

A

A QDOT - Qualified Domestic Trust.

Qualifications:

  • At least one trustee must be a US citizen, or a US. Corporation.
  • No distribution unless citizen-trustee can withhold estate tax amount.
  • Must keep adequate assets in the US to pay estate tax.
  • Must elect QDOT.
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11
Q

When did the estate tax credit become portable?

What does that mean?

A

2011.

A surviving spouse can use any exclusion not used by her last spouse to die.

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12
Q

Qualifications for portable estate tax credit (2)?

A

Both spouses must die in 2011 or later.

If second spouse remarries, and is pre-deceased again, unused credit from first husband is lost.

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13
Q

Is the portable estate tax credit reduced by gifts made by the first to die, with no gift tax paid?

A

Yes.

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14
Q

Can you use your spouse’s unused exclusion even if they didn’t leave you anything?

A

Yes, as long as they have unused exclusion.

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15
Q

How do you use your spouse’s unused exclusion if you remarry?

A

Give away the unused exclusion amount before your second spouse dies.

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16
Q

What is an over-qualified or under-qualified use of the UMD?

A

When too much or too little use is made of the UMD causing estate tax to be paid.

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17
Q

What is a B trust, or credit shelter trust?

How is it used?

A

A by-pass trust.

At death of first spouse, fill a bypass trust with their unused lifetime credit, use the UMD on the rest.

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18
Q

What is an ABC trust arrangement?

What are A, B, and C trusts again?

A

A = General Power of Appointment Trust. These assets are usable by the surviving spouse, and qualify for the UMD.

B = Bypass Trust. This maxes the deceased spouse’s lifetime exemption.

C = QTIP; provides lifetime income for the surviving spouse, but lets first-to-die spouse decide where assets will ultimately wind up.

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19
Q

Can B and C (Bypass and QTIP) trusts allow HEMS support for the surviving spouse?

Does that qualify them for the UMD?

A

The QTIP already qualifies (it gives all its income to the surviving spouse for life).

The Bypass doesn’t qualify, even with HEMS.

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20
Q

What can an ILIT do in estate planning?

3

A

Almost everything! Fund the trust in-vivos. Empower the trustee to purchase LI on the grantor.

  • Value of LI is not in the estate of the grantor.
  • Protecting assets from creditors
  • If surviving spouse is beneficiary they get:
    • income
    • HEMS
    • The right to $5k or 5% of trust corpus each year w/o subjecting trust corpus to taxation in surviving spouse’s gross estate.
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21
Q

Who owns the life insurance in an ILIT?

A

The trustee.

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22
Q

When should the insured NOT own their own life insurance policy?

A

When the aim of LI is to provide estate liquidity and benefits to heirs. This causes the benefit to be included in the gross estate.

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23
Q

What is the “capitalized income” approach for determining how LI is needed?

A

(Gross income - adjustments) ÷ risk free rate adjusted for inflation.

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24
Q

What are the 5 common objectives for LI?

A
  • Create an income stream for beneficiaries.
  • Source of funds for education
  • Liquidity at death
  • Source of retirement income
  • Create or sustain family wealth
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25
Q

What is the transfer for value rule?

A

Normally, LI benefits aren’t taxable income to the beneficiary. However, when the beneficiary becomes the beneficiary by a transfer for value, the death benefit above the basis is taxable unless one of the exceptions to the TFV rule are met.

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26
Q

What are the exceptions to the TFV rule?

5

A

The exceptions are when the TFV is to:

  • the insured
  • a partner of the insured
  • a partnership in which the insured is a partner
  • a corporation in which the insured is a shareholder or officer
  • a transferee who takes the transferor’s basis in the contract
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27
Q

Is the surrender value of LI taxable income?

A

Yes, above basis.

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28
Q

Are policy dividends on an LI policy taxable income?

A

No! They’re not like dividends on a stock, they’re a return of basis.

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29
Q

Is borrowing from your LI policy a good idea? Unless?

A

Yes—you get a favorable interest rate.

Unless you let the policy lapse. Then the loan is included in the gain on the policy and is OI.

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30
Q

Does a gift of an LI policy qualify for the annual exclusion?

A

Yes; it’s considered a present interest gift.

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31
Q

What is the value of a gifted LI policy? What does it depend on?

A

The value depends on whether the policy is paid up.

  • If in “pay-status” the insurance co. Will give you the value on the date of the gift.
  • If policy is paid up, the value is the cost of a replacement policy.
32
Q

If you gift money to an ILIT to pay premiums, how do you qualify that for the annual exclusion?

A

Give the beneficiaries a Crummey provision.

33
Q

What is “interpolated terminal reserve value”?

A

The value of an LI policy in pay status.

34
Q

What type of property is an LI policy?

A

OI property

35
Q

What is the AGI deductibility cap on gifts of LI to charity?

A

50% if given to a public charity.

30% if given to a private charity.

36
Q

Do you get an income tax deduction for naming a charity as the beneficiary of your LI policy?

A

No! You have to make them the policy owner.

37
Q

What happens when a donor gives an LI policy to a charity and dies w/in 3 years?

A

The death benefit is part of his gross estate, but is a donation to charity so is subject to the Unlimited Charitable Deduction—no additional estate tax.

38
Q

When an individual dies owning an LI policy on another person, what is included in his gross estate?

A

Interpolated terminal reserve + any unearned premium.

39
Q

What causes an LI policy on the deceased to be included in gross estate?

A

Any incidence of ownership, including the right to borrow from the policy.

40
Q

What is the 3-year look back rule for including LI in gross estate?

A

Any policy GIFTED w/in 3 years of death is included. TFV is not included in look back.

41
Q

How does a policy in an ILIT get around the 3-year look back?

A

The gift to the policy is $. The policy is purchased by the trustee.

42
Q

What is the “5 and 5” rule?

A

Power of appointments less than the greater of $5000 or 5% of the trust corpus do not trigger gift tax or inclusion in gross estate to the person holding the POA.

43
Q

What is the general POA rule for gifts to a trust?

A

Contribution to trust shouldn’t exceed $5k per beneficiary or 5% of trust corpus x # of beneficiaries. This way BENEFICIARIES aren’t subject to gift tax for letting their contributions lapse.

44
Q

What happens when LI proceeds are made available to the executor of the deceased’s estate?

A

They become part of the estate.

45
Q

How do ILIT’s use proceeds to pay for deceased’s funeral without having them included in gross estate?

A

They give the trustee of the ILIT either:

  • the right to purchase assets from the deceased’s estate;
  • the right to loan money to the deceased’s estate.
46
Q

What are the advantages of a cross-purchase agreement?

Are premiums deductible?

A

Advantages:

  • Other owners get a step to FMV of deceased owner’s shares.
  • Deceased owner’s shares are not available to creditors.

Premiums in cross purchase agreements are not deductible.

47
Q

What are the + and - of “stock redemption” or “entity purchase” agreements?

A

+ Fewer insurance policies to buy
+ Easier for younger partner than buying insurance on older partner.

  • Assets available to creditors
  • No step-up for other owners.
48
Q

What is Section 303, corporate redemption from closely held business?

What is the secret advantage of it?

A

The deceased’s estate can redeem enough shares to cover all death taxes and funeral and administrative expenses and these shares will be taxed as cap gains.

The secret is, since the shares step to FMV at death, there is no cap gain!

49
Q

How do you qualify for a 303 redemption?

A

More than 35% of individual’s gross estate must be shares in the closely held business.

If the deceased owned multiple businesses, they can be added together as long as they owned 20% of the outstanding stock of each one.

The person redeeming the shares must be responsible for estate taxes and expenses.

50
Q

Can suspended passive losses be cashed out on a final tax return?

A

Yes

51
Q

Are final medical expenses deductible on the estate tax return or on the individual’s last income tax return?

A

Either! If there’s no estate tax to be paid it’s usually best to deduct them on the individual’s income tax return.

52
Q

What are forms 1041 and 706?

A

1041 is an estate’s income tax return for income + expenses the estate incurs b-t the time of death and the settlement of the estate.

706 is the estate tax form.

53
Q

What are IRD assets? What’s the best use for them in estate planning?

A
  • Qualified plans
  • IRA’s
  • US savings bonds
  • Installment notes
  • Annuitized annuities
  • Accrued dividends and wages

Use them to fulfill charitable bequests so the estate doesn’t pay IRD.

54
Q

What is the term of the alternate valuation date, and what is required to take it?

A
  • It’s 6 mos. after the date of death.

- Value of gross estate must be less and estate tax must be less.

55
Q

What is not included in an alternate valuation?

A

Wasting assets - annuities, patents, royalties, installment notes, lease income

56
Q

What are the terms of Section 6166, Installment payment of Estate Tax?

A

You can pay your estate tax over 14 years. 4 years of interest only, followed by 10 of installment payments.

57
Q

How do you qualify for section 6166, installment payments?

A

Closely held business must be 35% of your AGE, plus

  • 20% of total capital interest in gross estate or
  • 45 or fewer partners, or
  • a corp with 45 or fewer shareholders and 20% of voting stock included in gross estate.

Closely held business must be operating at time of death.

58
Q

What is special use valuation, Section 2032A?

A

Normally, real property in an estate must be valued at its highest use valuation. 2032A allows a discount of up to 1.19M to an alternate use valuation.

59
Q

How do you qualify for 2032A?

A
  • Property must be used in farming, or business run by decedent or decedent’s family 5 out of previous 8 years.
  • Value of real and personal property must exceed 50% of gross estate, or 25% for business property.
  • Heirs must use property for 10 years to remain eligible.
  • Must file election.
60
Q

What are the rules to disclaim inherited property?

4

A
  • Must disclaim in full (can’t retain any interest)
  • Can’t redirect the inherited property
  • Must disclaim within 9 months.
  • Must disclaim in writing.
61
Q

Are there special disclaiming rules for surviving spouses?

A

Yes. They can disclaim and retain an interest.

You can disclaim to surviving spouse and assets get UMD, assuming they go to spouse.

62
Q

Who creates a QTIP?

A

A QTIP is a post-mortem trust; while an individual can express a desire for a QTIP, the QTIP and the decision of what to put in it belongs to the executor.

63
Q

Is the Generation Skipping Transfer Tax in addition to or instead of gift and estate taxes?

A

In addition to!

64
Q

Are the lifetime and annual exemptions the same for the GSTT and gift and estate taxes?

A

Yes

65
Q

What is the GSTT tax rate?

A

Flat 40%

66
Q

Who are “skip persons” for the GSTT?

3

A
  • Lineal descendants of the transferor’s grandfather or spouse’s grandfather who are 2 or more generations younger than the transferor.
  • Any non-lineal descendant who is 37.5 years younger than the transferor.
  • Spouse, or former spouse + charitable orgs are considered the same generation as the transferor, and adoptees count the same as blood relatives.
67
Q

Are descendants of your grandparent’s siblings potentially skip people? What does it depend on?

A

Descendants of grandparent’s siblings may be skips, but they’re not considered lineal descendants of grandparents, so whether or not they’re skips is determined by their age.

68
Q

Can trusts be skips?

Can charitable trusts be skips?

A

Trusts are skips if ALL interests in the trusts are held by skips, or if distributions can only be made to skips.

Charitable trusts can NOT be skips since charities are considered same generation as transferor.

69
Q

What are the 2 prongs of the “predeceased ancestor exception”?

A

If a lineal descendent dies, their descendants move up 1 generation, so a grandchild of a deceased is not a skip.

If you have no lineal descendants, grand nieces and nephews are not skips; Laura and John’s kids would not be skips to me.

70
Q

Who is responsible for the GSTT on a direct skip, a taxable termination, and a taxable distribution?

A
  • Direct skip: the donor.
  • Taxable termination: the trustee.
  • Taxable distribution: the transferee.
71
Q

What defines a taxable termination?

A

A termination to skip people which:

  • Is not subject to estate or gift tax
  • A non-skip person receives an interest.
72
Q

When did the current iteration of the GSTT begin?

A

10/22/1986.

73
Q

What is the annual exclusion for the GSTT?

Are medical and tuition payments also excluded?

A

$15,000

Yes

74
Q

Can skip gifts be split?

A

Yes, when you split gifts on 709, its assumed you’re splitting skip gifts as well.

75
Q

What is the FMV of a skip gift for tax purposes?

A

FMV of gift + GSTT paid.

76
Q

What is a generation skipping trust?

A
  • sons and daughters are the income beneficiaries.

- grandchildren are the remainder beneficiaries.

Estate Planning (4 decks)

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